You may be able to reduce your rental property mortgage in a Chapter 13 bankruptcy through a mortgage "cramdown." Read on to learn when you can use a cramdown, and how it works.
(To learn more about cramming down property in Chapter 13 bankruptcy see the articles in our Reducing Loans and Mortgages In Chapter 13 topic area.)
How Do I Reduce My Rental Property Mortgage?
If your rental property is worth less than what you owe on your mortgage, then you can reduce the principal balance of your mortgage to what your property is worth. You can do this by paying the fair market value of your rental property to your lender through your Chapter 13 repayment plan instead of the entire balance of your mortgage.
For example, if your rental property is worth $100,000 but your mortgage is $200,000, you would be able to reduce your mortgage to $100,000. After paying off the reduced balance of the mortgage in bankruptcy, the remaining portion will get discharged (wiped out) and you will own the property free and clear.
Are There Other Advantages to Using Chapter 13 Bankruptcy to Reduce My Mortgage?
Cramming down your rental property mortgage through a Chapter 13 bankruptcy may also allow you to reduce your interest rate. The interest rate you pay your lender will be determined by the court and will usually be lower than your mortgage note rate. Further, if your rental property gets foreclosed on, you may be responsible for any deficiency not covered by the foreclosure sale proceeds. Reducing your mortgage in bankruptcy assures that you won't be liable for a deficiency balance in the future.
When Do I Have to Pay Off My Mortgage?
Most courts require that you pay off the reduced balance of your rental property mortgage during your Chapter 13 bankruptcy. Since a Chapter 13 bankruptcy cannot exceed five years, this may present a problem if your income is not sufficient enough to pay off your mortgage during this limited time frame.
To learn more about how this Chapter 13 procedure works, see Mortgage Cramdowns in Chapter 13 Bankruptcy.